The U.S. “fiscal cliff” clock is ticking loudly, and so far U.S. politicians haven’t been able to cooperatively silence it. A sweeping roster of automatic spending cuts and tax hikes remain set to go into effect at year-end with what could be detrimental economic consequences.
This week, our Templeton Global Equity Group (TGEG) provides a collective perspective of potential events as we count down toward the fiscal cliff deadline, and possible implications for the savvy investor. Key aspects from the TGEG point of view:
- In its entirety, the fiscal cliff is estimated to reduce the U.S. federal budget deficit by 4%-5% of gross domestic product (GDP) in FY 2013 ($670 billion), a severe tightening of fiscal policy which, if no deal is struck, would involve sweeping tax increases and mandated spending cuts across all budget items.
- In our opinion, it is doubtful that the fiscal cliff will fully come to pass as a number of the provisions within the cliff enjoy bipartisan support for extension or renewal.
- The larger the fiscal drag, the worse for equities in the near term. The more cyclically leveraged regions and sectors would be most impacted by the fiscal cliff.
- Risk assets do not like uncertainty, creating selective investment opportunities for disciplined bargain hunters.
- Longer term, the U.S. government must proactively address its fiscal position or rising interest rates will become a secular headwind for equity markets.